Credit utilization is the percentage of your available credit that you are using. It accounts for 30% of your FICO score, making it the second most important factor after payment history.
A utilization rate below 30% is considered good. Below 10% is excellent. Paying your credit card balances from 80% down to 10% can boost your score by 30-50 points in 30-60 days.
This is the fastest way to improve your credit score before applying for a mortgage. It's much faster than waiting for late payments to age off your report.
How Utilization Works
Utilization is calculated both per-card and overall. Maxing out one card hurts even if overall utilization is low. Keep each card under 30% of its limit.
Score Impact
80% utilization: significant negative impact. 50% utilization: moderate impact. 30% utilization: minimal impact. 10% utilization: optimal. 0% utilization: slightly less optimal than 1-10%.
Quick Wins
Pay down cards to under 30% (or 10% for maximum impact) at least 30 days before applying. This cycle gives time for the credit bureaus to report the lower balance.
Card Payoff Strategy
The snowball method: pay the card with the highest utilization first, then move to the next. The avalanche method: pay the card with the highest interest rate first. Both work for utilization.
Timing
Utilization is calculated based on the balance reported by your credit card company. Pay your balance before the statement closing date, not just the due date.
Myths About Utilization
Myth: carrying a balance helps your score (false). Myth: closing paid-off cards helps (false - it reduces available credit). Myth: utilization has memory (false - it resets monthly).